SAME AS LAST YEAR?

Last year, 2010,  witnessed a ribald stock and commodity run into the month of April, when the $1.75 trillion QEI ended. It coincided with an indictment against Goldman Sachs and began a summer-long correction, where green-shoots died and the prevailing perception was that the market “just had to crash” when summer ended. Obviously that is not the way things turned out.

Uncle Ben rode to the rescue with QEII and both equities and commodities were off to the races. It was one of the greatest one-way six months in market history. Every one’s 401k’s were up 20-30% almost regardless of what they owned, as long as it wasn’t short. He wanted asset price inflation and it was bought and paid for with a $7B injection of funds almost each and every trading day.

We are now at the tail-end of the second market/asset rescue package and prices of many non-real estate assets have run significantly higher. The fact is that Wall Street and small speculators are conducting themselves in exactly the way Uncle Ben wants us to; to keep bidding up prices until confidence comes back. It has been the plan all along. But it has gone too far in price to the point of demand destruction in virtually all soft or consumable commodities and has spilled over to everything except real estate, with silver being the most exciting. Its volatility is breathtaking and stealing most traders attention.

Regardless of commodity prices, we have been told (with confidence) that inflationary forces from skyrocketing prices are “transitory”. How do they know this? Because without slowing the stimulus in any way, “they’ve” simply upped the margin requirements for commodity products in order to flush highly-margined and vulnerable speculators. Though you need 50% margin to buy a stock, it is much, much lower for most every commodity. Silver margin has been raised five times, yet it is only at 12.5%. And you wonder why commodity traders make more than anyone, or flame out quickly? Massive leverage. 

Over the past two weeks there has been firey tumult in the commodities markets as the most speculated-on products, silver and oil, have moved sometimes 10% in one trading session. And most other soft commodities have been selling off in a significant percentage. Some of the bobble heads on  TV will tell you that it is all linked to the economy and future events. That is a huge load of bullshit. Almost zero of the market moves are linked to the economy. Virtually all market moves are linked to the markets and nothing else. Commodities wild rise does not mean that the economy is on fire and its subsequent fall does not mean that economic activity is slowing. No, you can infer nothing but stimulus, liquidity, and position posturing in almost every market move. Fundamentals play only the smallest role in the big picture. Same as last year. And just like last year, Goldman Sachs is the target of the government. Coincidence?     

The experiment of stimulus will not fully end when QEII is over. The game will not end so quickly and that is what the current “adjustment” is all about. Even with the commodity correction and a pause in the equity market, we could sprint to test the yearly high and get everyone leaning the wrong way. But certainly there has been damage done to the major indices and most certainly the commodity complex. The trade was so easy, that everyone is “in”. It is time for all markets to chop into the usual summer slowdown just like last year.

Some say the economy is on the mend. That is not really true. It is as warped and twisted as the financial marketplace, thanks to our Central Planners who operate the strings to the puppet markets.